The Continent's small country with clout

ByRon Scherer, business and financial correspondent of The Christian Science MonitorMarch 4, 1980

Luxembourg
— From the 16th through the 19th centuries the fortress of Luxembourg was the fulcrum of Europe: To breach its walls meant to control the crossroads of the continent.

Today, Luxembourg is still a small country with a major impact on Europe.

The grand duchy's steel industry is the third largest in Europe; the banking sector is second only to London; its radio and television stations are watched or listened to by more French, Germans, and Belgians than Luxembourgers. And in spite of its small population (350,000), it is one of the seats of the European Community, of which it is a member.

At the same time Luxembourg enjoys Europe's second highest standard of living (trailing only the Swiss), the lowest unemployment rate in Europe, at 0.8 percent, the best labor record in the world with no strikes since World War II, and a reasonable inflation rate of 5.5 percent.

One of the key reasons the country works is because of its ability to use its smallness to its advantage. "There is an old saying," says Joseph Kratochwil, general secretary of one of the nation's largest labor unions, "if you don't know someone walking down the street, it must be a tourist." Thus, the country's labor, business, and political leaders know each other well. They are used to solving economic problems in a manner that is beneficial to the country -- agreements referred to as "tripartile" agreements. Through it, the country has avoided labor strife and unemployment during a period of shrinkage in its steel industry.

Another important factor that affects the country is its memory of the two most recent wars fought in Europe. Both wars devasted Luxembourg, leaving permanent scars on both the land and the population. It's only recently, some Luxembourgers say, that the inhabitants have forgiven the Germans for invading their country. Likewise, the role the United States had in liberating the country has colored the local attitude toward Americans, making the duchy one of the most pro-American countries in the world. Luxembourgers also remember that it was an American company, Du Pont, that first set up a postwar factory to help get the country back on its feet.

In spite of its pro-American attitudes and the fact many of its inhabitants speak English, Luxembourg remains a blend of two cultures: the French and the german. "You could call it a sharing of the two civilizations," explains Prime Minister M. Pierre Werner.

While enjoying the cross fertilization of the two cultures, Luxembourgers have created a problem for themselves: The good life has led to a dramatic decline in the number of Luxembourgers. "Demography is our No. 1 problem," says Paul Helminger, secretary of state for the Ministry of Foreign Affairs. Currently, there are more deaths of Luxembourgers than births. And the birthrate has slipped considerably since 1970.

As a consequence some 22 percent of the population is made up of foreigners. In the early 1970s the influx was mainly of Italian. Today, however, it is Portugese. These workers, like many all over Europe, take the jobs in construction or garbage pickup that the Luxembourgers themselves are not interested in. Their children attend public schools and learn Luxembourgese, the language. However, a major question facing the country, most observers agree, is whether it can absorb a large percentage of foreigners and still maintain its national identity.

Henri Ahlborn, president of the chamber of commerce, maintains that "Luxembourg is so small it can integrate the workers into the country without losing its identity." And the unions, says Mr. Kratochwil, believe the new workers can be integrated well. It fact, many in the union, he notes, are second or third generation Italians who have become a part of the country. Still, this is a problem the country must face.

Another major long-term uncertainty facing the country is where it will obtain its energy supplies. The duchy had originally planned to build its own nuclear power plant on the Moselle River, but canceled those plans when the plant proved unpopular. The French, however, are planning a major nuclear power plant only 10 miles from the site Luxembourg planned to use. There is considerable concern in the duchy over the construction of the plant. Mr. Werner plans a trip shortly to try to negotiate some financial and safety assurances from the French government.

Although the duchy may buy power from the French plant, it becomes dependent on a "foreign source" of energy. And since about $268 million of the $321 million trade deficit is due to importing energy, it doesn't solve a basic problem for the duchy.

The small country has studied the possibility of building a coal-powered plant. However, according to Mr. Helminger, this plan probably won't work either because of pollution questions.

Over the short and intermediate terms, the duchy has no major energy problem and Mr. Werner reports that the country plans to "tighten up" its contracts with its suppliers in Belgium and Germany.

For each of the economic pillars that is holding up the Luxembourg economy, there are potential problems.

For example, Luxembourg's steel industry, representing 37 percent of the gross national product (the total output of goods and services), has been pared down to a much smaller and efficient company. But it is still losing money.

If the US enters a recession, the whole European steel industry, which has been exporting steel products to the US, will be affected. Furthermore, since Luxembourg exports most of its steel products to other European countries, the duchy is at the whim of the politics of each of those countries -- many of whom may feel forced to move to protectionist activities. The fact that the steel sector's impact on the total Luxembourg economy has been reduced from 50 percent to 37 percent eases the problem somewhat.

Talking up the slack has been the banking sector. However, Mr. Kartochwil of the trade unions notes, "the banks can disappear when they want to." In fact, Luxembourg bankers and politicians anticipate some kind of contraction in Luxembourg banking since the whole international banking arena is expected to shrink in the 1980s.

There are political questions relating to the future growth of Radio Television Luxembourg and its plans to broadcast television from a satellite. Both France and Germany are concerned about the impact of free commercial television on their populations.

Finally, there have been periodic murmurings by the European Community that it should consolidate its own operations. Currently, the EC has three headquarters -- in in Brussels, Luxembourg, and Strasbourg.

Over the short term, the Luxembourg economy should continue to the strong. Georges Als, the director of the Bureau of Statistics and Economic Studies for the duchy, expects the gross national product to grow 2 percent in 1980, down from 2.5 percent in 1979 and 4.3 percent in 1978. Unemployment will remain basically unchanged at around 0.9 percent -- or 1,200 people. He predicts inflation will be 6.5 percent. Mr. Werner, the prime minister, expects inflation to be 5.5 percent and some businessmen, traditionally more pessimistic , forecast a 10 percent rate.

All the structural problems facing the nation's economy are difficulties the Luxembourgers know about. The government, the trade unions, and the management of the steel company, for example, are intent on making the steel industry competitive with the Japanese -- the lowerst-cost steel producers. Furthermore, there is a genuine effort being made to diversify further the economy. The government, through the Luxembourg Board of Economic Development, is seeking out companies desiring to build light manufacturing facilities near good air transportation and skilled labor pool. In short, there is a definite effort under way to ensure the duchy servives economically into the 21st century.